Affordability assessment
An affordability assessment checks whether a borrower can repay a loan from income left after existing debt payments and living costs. A lender can use debt to income and disposable income, with a buffer or a higher-rate test for a variable-rate loan, to set the largest affordable loan under its rules.
Example
For illustration, assume net monthly income of $3,000, existing debt payments of $600 and living costs of $1,700. Disposable income is $700 ($3,000 − $600 − $1,700); with an illustrative $100 buffer, the new payment would need to fit within $600. If gross monthly income is illustratively $4,000 and total monthly debt payments including the new payment are $1,200, debt to income is 30%.
Calculating income available for a new payment
Start with the monthly income figure supplied for the assessment. Debt to income can use gross or net monthly income, but disposable income starts from net income, with existing debt payments and living costs subtracted.
Compare the proposed monthly payment with the amount left. The payment must fit within that amount, and the lender may leave a buffer under its policy.
Setting the largest affordable loan
The lender's policy sets the debt-to-income limit and buffer it applies. A DTI limit can cap monthly debt payments, including the proposed loan, as a share of gross or net monthly income.
For a variable-rate loan, the lender can test the payment at a higher rate. Some markets set affordability rules in regulation, including the UK's FCA rules and South Africa's National Credit Act.
Questions we get asked
Does an affordability assessment guarantee loan approval?
No. It checks repayment capacity under the lender's assessment rules, but it is not a promise that the application will be approved.
Who sets the policy used in an affordability assessment?
The lender writes the policy and supplies the data used in the assessment. In some markets, affordability rules are also set in regulation.
Does an affordability assessment use gross or net monthly income?
Debt-to-income can be calculated against gross or net monthly income; the lender’s policy determines which. Disposable income is what remains after existing debt payments and living costs are subtracted from net income.
The free affordability calculator checks debt to income and the largest affordable loan under DTI, buffer and rate stress rules.
